Credit risk

Fannie Mae speeds up credit risk transfer mechanism


Before restarting CRT offerings this year, the agency had withdrawn from the market for a while, with its previous CRT transaction closing in March 2020.

“When they do a credit risk transfer transaction, it’s taking the risk of this huge bucket [the reference loan pool] and sell most of the credit risk items, ”said Roelof Slump, managing director of US RMBS at Fitch Ratings. “Fannie Mae had been on a brief hiatus until recently to re-engage in this market (CRT).

“We have been quite active on the Freddie Mac side and plan to note Fannie Mae’s Connecticut Avenue Securities Trust Series 2021-R02 credit risk transfer securitization which will close in early December.”

Through a CRT transaction, private investors participate with government-sponsored enterprises (GSEs) Fannie and Freddie in sharing a portion of the mortgage credit risk in the benchmark loan pools retained by GSEs. Investors receive payments of principal and interest on the CRT Notes they purchase, but if credit losses exceed a predefined threshold per security issued, then investors are responsible for absorbing losses exceeding that threshold.

CAS 2021-R02 offer represents Fannie Mae’s offer 43e CAS operation since first offer in October 2013. Collectively, these CRT deals involved some $ 49 billion in notes issued against pools of mortgage loans to a family worth $ 1.6 trillion. Freddie Mac also launched his first CRT contract in the market in 2013 and since then “has transferred a total of about $ 81 billion in credit risk on about $ 2.5 trillion in mortgages,” a Freddie Mac press release of November 15.

The efforts of Fannie Mae and Freddie Mac on the CRT front have been reinforced recently by proposals for changes to their capital reserve rules which are being put forward by the Federal Housing Finance Agency (FHFA), which oversees the GSEs. The pending changes have been welcomed by at least one industry group, the Housing Policy Council (HPC), which represents many of the country’s leading mortgage originators and managers.

Ed DeMarco, President of HPC, recently wrote a letter to the legal advisor of the FHFA indicating his support for the changes proposed by the agency to the regulatory capital rules, which include the reduction of the risk weight assigned to any retained CRT exposure from 10% to 5%. HPC and other stakeholders have argued that the Trump-era rule’s leverage cushion is excessive compared to bank regulators.

This change in the capital retention risk weight for CRT exposure, along with other adjustments to the capital reserve requirements, “would make CRT transactions a bit more economical” and “extend risk reduction and risk reduction. competitive advantages of CRT transactions, ”DeMarco’s letter to the FHFA General Counsel states.

“CRT transactions reduce the systemic risk posed by enterprises (GSE) by reducing the concentration of that risk on companies ‘balance sheets and the volatility inherent in the credit performance of companies’ guarantee activities,” DeMarco wrote in the letter. .

“The Housing Policy Council will continue to advocate for broad housing finance reform,” DeMarco said in a previous interview with HousingWire. “And that includes continuing to develop the credit risk transfer market.

“What the FHFA has done over the past two months, signaling a renewed interest in developing the CRT market, is really important, and we will continue to promote it.”

the serious delinquency rate for Fannie Mae has been around 2% throughout the pandemic.